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R.E. DAVIS CHEM. CORP. v. NALCO CHEM. CO.

November 13, 1990

R.E. DAVIS CHEMICAL CORPORATION, Plaintiff,
v.
NALCO CHEMICAL COMPANY, CLARENCE R. DAVIS, JOHN C. KISALUS, ROBERT W. REYNOLDS, and WESLEY E. CRAVEY, Defendants


Ilana Diamond Rovner, United States District Judge.


The opinion of the court was delivered by: ROVNER

ILANA DIAMOND ROVNER, UNITED STATES DISTRICT JUDGE

 I. INTRODUCTION

 R.E. Davis Chemical Corporation, the plaintiff in this action ("Davis Chemical" or "plaintiff"), alleges that the defendants, Nalco Chemical Company ("Nalco"), Clarence R. Davis ("Clarence Davis"), John C. Kisalus ("Kisalus"), Robert W. Reynolds ("Reynolds"), and Wesley E. Cravey ("Cravey"), misappropriated Davis Chemical's formula for a chemical compound used in the gasoline refining and re-refining industry and that Nalco currently sells a compound based upon the same chemical principle as that formula. Davis Chemical's complaint is framed in two counts: Count One asserts three separate claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. ("RICO"); and Count Two asserts a state law claim of unfair competition. Pending before the Court is defendants' motion pursuant to Fed. R. Civ. P. 12(b)(6) to dismiss the complaint for failure to state a claim upon which relief can be granted. For the reasons set forth below, the Court grants defendants' motion. *fn1"

 The Court has assumed for purposes of the pending motion to dismiss that the facts alleged in Davis Chemical's complaint are true. W.E. O'Neil Const. Co. v. National Union Fire Ins. Co. of Pittsburgh, 721 F. Supp. 984, 986 (N.D.Ill. 1989) (Rovner, J.), citing Conley v. Gibson, 355 U.S. 41, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957). *fn2"

 In 1961 Robert E. Davis ("Davis"), the president of Davis Chemical, invented REX-121A, a chemical additive compound used in the gasoline refining and re-refining industry to process alkylate. *fn3" That same year, Davis assigned his rights and interest in REX-121A to Davis Chemical, of which he and his spouse are the sole shareholders. REX-121A is based upon a unique formulation known only to Davis, and Davis Chemical has consistently maintained the confidentiality of the formula for the additive as a trade secret. *fn4"

 Davis Chemical has marketed and sold REX-121A to refiners and re-refiners throughout the country since 1963. Sales of REX-121A are made pursuant to written secrecy agreements pursuant to which the purchaser agrees not to analyze the additive or to disclose anything which the purchaser might learn about the additive in the course of using it. In 1985, Mobil Oil Corporation purchased REX-121A pursuant to such a secrecy agreement.

 Nalco is a competitor of Davis Chemical. *fn5" In late 1984, Reynolds, the marketing manager of Nalco, decided that Nalco should develop and market its own alkylation additive. In February, 1985, Nalco hired Kisalus as a chemist for its "RPC Group", which developed new products. Defendant Cravey was Kisalus' supervisor. On or about February 11, 1985, Cravey directed Kisalus to develop an alkylation additive.

 Defendant Clarence Davis was a Nalco salesman whose principal responsibility was to manage Nalco's sales account with Mobil Oil Corporation at Mobil's refinery in Beaumont, Texas. On or about April 11, 1985, Clarence Davis, with the knowledge and consent of Reynolds, removed a sample of REX-121A from a pump which belonged to Davis Chemical and which was located at Mobil's Beaumont refinery. This was done without the knowledge or consent of either Mobil or Davis Chemical. Clarence Davis "sent or delivered" the sample to Nalco's laboratory in Sugar Land, Texas for an analysis of its contents. The sample "was thereupon delivered" to Kisalus, who, with Cravey's knowledge and consent, had it evaluated by the analytical department of Nalco's RPC Group. Mark A. Ward, a Nalco chemist, performed the analysis, and the results were "thereupon delivered" to Kisalus, Reynolds, and Cravey. At this time, Kisalus and Nalco had not yet developed their own alkylation additive.

 After receiving the manual and the results of the analysis performed on the sample of REX-121A, and using the information he obtained from these sources, Kisalus developed an alkylation additive which contained ingredients either identical or comparable to those contained in REX-121A and which was based upon the same chemical principle as REX-121A.

 Once the new additive was tested, Kisalus, at the request of Cravey, mailed data about the additive to Nalco's patent attorneys in Naperville, Illinois, who in turn prepared a patent application. In the course of preparing the application, Nalco's attorneys consulted with Kisalus by telephone and sent to him drafts as well as the final version of the application through the United States mail. On or about February 11, 1987, Kisalus signed the application and, on the same date, assigned to Nalco his entire proprietary interest in the new additive. On or about February 24, 1987, the patent application "was mailed" to the United States Patent and Trademark Office through the United States mail. Nalco's patent attorneys subsequently prepared a second patent application for the additive. After Kisalus signed this application, the attorneys "caused same to be mailed" to the Patent and Trademark Office via the United States mail.

 On each of the patent applications, Kisalus indicated that he was the first and only inventor of the alkylation additive and that the information provided on the application with respect to the additive was accurate. The applications disclosed nothing about REX-121A or the similarities between it and Nalco's additive.

 Nalco has sold its additive in competition with Davis Chemical since 1986. In connection with sales of the additive, Nalco has mailed invoices and other correspondence to its customers through the United States mail and has caused the additive itself to be transported in interstate commerce.

 In February and March of 1988, Nalco induced two of Davis Chemical's customers, Marathon Oil Company and Mobil Oil Corporation, to begin purchasing Nalco's alkylation additive instead of Davis Chemical's REX-121A. As a result, Davis Chemical lost anticipated sales of $ 46,362 to Marathon from February 1, 1988 through November 22, 1988, and $ 262,000 from March 9, 1988 through January 31, 1989.

 On various occasions within the past ten years, Nalco has also obtained samples of products manufactured by other competitors for the purpose of analyzing the composition of those products and using the information in the development of its own products. In each instance, Nalco obtained the sample without the knowledge or consent of its competitor. *fn6"

 III. SUMMARY OF THE RICO ALLEGATIONS

 Although each of the four subsections of § 1962 addresses a distinct type of racketeering-related conduct, they have in common three fundamental elements: a "person", an "enterprise", and a "pattern of racketeering activity". Each of these elements must be pleaded separately. See Chicago HMO v. Trans Pacific Life Insurance Co., 622 F. Supp. 489, 495 (N.D.Ill. 1985) (Rovner, J.). The RICO statute defines the term "person" to include "any individual or entity capable of holding a legal or beneficial interest in property." The term "enterprise" is defined to include "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity." Although the terms "person" and "enterprise" as defined both embrace individuals and entities, they are distinct in terms of the roles they play in a RICO cause of action. Id. at 495. Within the RICO framework, "persons" are the individuals or entities which commit the statutorily proscribed acts, and only they are subject to liability under RICO. Id. at 494. The "enterprise," although it too may be an individual or an entity, is the vehicle through which the "person" or "persons" accomplish the prohibited activity. For example, it is the "enterprise" which is the repository of the funds reaped from racketeering activity in violation of § 1962(a), or which is operated through a pattern of racketeering activity in violation of § 1962(c). A RICO complaint must therefore distinguish between the "persons" who allegedly violated the statute and the "enterprise" through which these "persons" acted. Id. at 495. *fn8" Finally, the complaint must allege a "pattern of racketeering activity," which is defined in § 1961(5) as a course of conduct including "at least two acts of racketeering activity, one of which occurred after the effective date of this chapter and the last of which occurred within ten years . . . after the commission of a prior act of racketeering." Section 1961(1) lists the types of conduct which constitute racketeering activity. For purposes of plaintiff's complaint, it is sufficient to note that the offenses of mail fraud, wire fraud, and the transportation of stolen property in interstate commerce qualify as predicate acts of racketeering. See § 1961(1)(B).

 Paragraphs 15 through 19 of plaintiff's complaint set forth the allegations designed to plead the three elements discussed above. Certain of these allegations do not require extended discussion here. For example, in paras. 17 and 19, plaintiff alleges that Nalco is an "enterprise" and that Kisalus, Reynolds, Cravey and Clarence Davis are "persons".

 It is the "pattern of racketeering activity" element of the RICO claim which supplies the foundation for defendants' motion to dismiss. Paragraph 15 of the complaint purports to allege predicate acts of mail fraud, wire fraud, and the transportation of stolen property in interstate commerce. Insofar as defendants have asserted that the allegations contained in paras. 15 and 16 do not suffice to establish the "pattern of racketeering activity" required to state a violation of 18 U.S.C. § 1962 (a), and (c), para. 15 merits a more lengthy discussion.

 In para. 15(A), plaintiff alleges that the mail and wire communications which took place in connection with the preparation and filing of the two patent applications furthered a scheme to defraud both the United States Patent and Trademark Office *fn9" and plaintiff, in that the applications falsely represented that Kisalus was the original, first and sole inventor of the alkylation additive, fraudulently concealed the fact that Kisalus had based his work upon the analysis of REX-121A and the confidential manual, and claimed an exclusive right to a formula which was actually plaintiff's trade secret. Based upon these purported misrepresentations, plaintiff asserts that the mail and wire communications were made in violation of 18 U.S.C. §§ 1341 (mail fraud) and 1343 (wire fraud).

 Paragraph 15(B) alleges that these same communications were made in furtherance of a conspiracy among the defendants to misappropriate plaintiff's trade secret. Pursuant to this alternate characterization, plaintiff alleges that defendants are liable for the transportation of stolen property in interstate commerce under 18 U.S.C. § 2314. *fn10"

 In para. 15(C), plaintiff alleges that the transportation of Nalco's alkylation additive for sale to its customers also amounts to the transportation of stolen property in interstate commerce, giving rise to liability under 18 U.S.C. §§ 2314 and 2315. *fn11"

 Finally, paras. 18 and 19 identify the three separate RICO claims which Davis Chemical asserts against defendants. In para. 18, plaintiff alleges that defendants derived income from a pattern of racketeering activity which was used in the operation of Nalco, in violation of 18 U.S.C. § 1962(a). In para. 19, plaintiff alleges that the individual defendants conducted and participated in the affairs of Nalco through a pattern of racketeering, thereby violating the provisions of both subsections (c) and (d) of § 1962.

 With the RICO allegations having been summarized, the Court can proceed to address the motion to dismiss. Defendants have challenged the adequacy of each of the three RICO claims asserted by plaintiff on a variety of grounds. The Court has considered each RICO claim in turn, beginning with plaintiff's claim against the individual defendants under § 1962(c).

 IV. ANALYSIS

 A. Section 1962(c)

 Section 1962(c) of RICO renders liable a person who, as the employee or associate of an enterprise, conducts or participates in the affairs of the enterprise "through a pattern of racketeering activity." Plaintiff alleges that defendants participated in the affairs of Nalco through a pattern of racketeering activity which included multiple acts of mail and wire fraud as well as the transportation of stolen property in interstate commerce. See Complaint para. 15. However, defendants contend that the complaint does not meet the requirements of § 1962(c) in two principal respects:

 
(1) the allegations as to the predicate RICO offenses are insufficient because
 
(a) they do not establish that each defendant committed at least two predicate acts of racketeering, and
 
(b) they do not allege fraud with particularity; and
 
(2) the complaint fails to allege a pattern of racketeering activity.

 The Court has addressed each of these arguments below. *fn12"

 1. Sufficiency of the Predicate Act Allegations

 As set forth above, among the elements which plaintiff must allege in order to successfully state a claim under RICO is that defendants engaged in a pattern of racketeering activity. This in turn requires plaintiff to allege that defendants committed two or more predicate acts of racketeering. 18 U.S.C. § 1961(1). Defendants' first challenge is to the sufficiency of the predicate act allegations. They argue (a) that the complaint fails to allege that each defendant committed two or more predicate acts of racketeering and (b) that the complaint fails to allege fraud with particularity. The Court has addressed these arguments in turn below.

 a. Failure to allege that each defendant committed two or more predicate acts of racketeering

 Section 1962(c) imposes liability upon any person who participates in the affairs of an enterprise through a pattern of racketeering activity. Because a "pattern of racketeering activity" requires at least two acts of racketeering activity, 18 U.S.C. § 1961(5), it follows that an individual must have committed at least two predicate acts in order to be held liable under § 1962(c). See Celpaco, Inc. v. MD Papierfabriken, 686 F. Supp. 983, 992 (D. Conn. 1988); Rich-Taubman Associates v. Stamford Restaurant Operating Co., 587 F. Supp. 875, 878-79 (S.D.N.Y. 1984). See also Beck v. Cantor, Fitzgerald & Co., supra, 621 F. Supp. at 1551 (plaintiff had not pleaded RICO claim with particularity where, inter alia, he had not alleged that each defendant had violated the wire or mail fraud statutes at least twice); Wilson v. Askew, 709 F. Supp. 146, 152 (W.D.Ark. 1989).

 As defendants read the complaint, plaintiff has alleged only that they conspired to commit mail fraud, wire fraud, and the interstate transportation of stolen property. Although each of these three substantive offenses qualifies under § 1961(1)(B) *fn13" as a predicate act of racketeering, defendants contend that the conspiracy to commit such offenses does not qualify as such an act. Accordingly, in defendants' ...


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